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Morningstar’s 15 Best ASX Share Ideas

Morningstar's top 15 picks
Leaders

Of the 200 companies that Morningstar analysts research on the ASX, 15 companies have made it onto the firm’s Best Stock Ideas for August.

Industrials

The long growth runway of Brambles (ASX: BXB), particularly in North America and Europe is under-appreciated by the market. The company is currently facing a combination of labour, transportation and lumber cost pressures, but this should recover as longer-term rising expenses are passed-on to customers via indexed contracts.

Fair Value Estimate: $13.20

  • Despite a difficult first half, Lendlease (ASX: LLC) is expected to complete $2 billion of developments in the June half with further increases in subsequent periods. There is significant earnings upside given the current project pipeline of over $100 billion. Given the new CEO’s dedication to meeting production targets, Morningstar expects the company will reach its $8 billion annual development goal.

    Fair Value Estimate: $14.45

    A recovery from pandemic impacts, more rational mobile pricing and ongoing synergies from the Vodaphone merger should drive an earnings recovery for TPG Telecom (ASX: TPG). Key executives have left the business and concerns linger over the NBN, but Morningstar believes this is more than reflected in the current share price.

    Fair Value Estimate: $7.40

    Consumer staples and discretionary  

    G8 Education (ASX: GEM) struggled during the pandemic as lockdowns impacted revenue. But with additional federal government support and a large capital raising under its belt, occupancy rates should recover during 2022. The longer-term outlook is also positive as the population grows and female workforce participation increases.

    Fair Value Estimate: $2.00

    Funeral operator InvoCare (ASX: IVC) similarly was hit by pandemic restrictions and lower mortality rates. But Morningstar expects this will be transitory, with 2022 being the first full year without attendance limits. With respected brands and scale advantages in a highly fragmented market, Invocare should be able to keep taking market share and grow 7 per cent annually until 2026.

    Fair Value Estimate: $15.30

    Former market darling A2 Milk Company (ASX: A2M) continues to be unloved by the market as high inventory and a slower-than-expected rebound in sales weigh on the share price. English-label sales are slowing, but Chinese-label sales continue to grow. The analyst believes that the infant milk producer can grow by 15 per cent for the next five years, along with improved EBITDA margins.

    Fair Value Estimate: $7.20

    Financials

    Beleaguered fund manager Magellan Financial Group (ASX: MFG) has been sold-off too far. The flagship global equities strategy is strongly positioned to outperform its benchmark. Furthermore, the business has several growth levels including new products and principal investments. Finally, Magellan’s enormous scale means market performance should offset periodic investor outflows.

    Fair Value Estimate: $31.30

    Westpac (ASX: WBC) is the pick of the big four banks, in Morningstar’s view, with net interest margins and operating expenses to alleviate over the medium term. As the nation’s second-largest lender, funding cost advantages should allow the bank to price competitively. Risk and customer remediation costs should phase-out and divestments present a chance to reset the cost base. The bank is well-provisioned and well-capitalised with “generous” fully franked dividends for shareholders.

    Fair Value Estimate: $29.00

    Gold

    Newcrest Mining (ASX: NCM) is the best-value gold miner, Morningstar believes. The market is waiting for production and earnings to eventuate before pricing-in development projects at Havieron, Red Chris, and Wafi-Golpu. Morningstar is positive on all three, therefore investors get the chance to buy before the projects are fully factored-in to the share price.

    Fair Value Estimate: $33.00

    Energy

    The market is understating Woodside Energy Group and gas’s role as the world transitions to renewables. The company has an excellent balance sheet, low-cost/long-life operations and a solid pipeline of development projects. The merger with BHP’s oil and gas assets increases asset diversification and the combined group should more than double daily production by 230 million oil barrels by 2026.

    Fair Value Estimate: $43.00

    AGL Energy (ASX: AGL) is a more high-risk, high-reward option. Earnings have been hit in recent years, but a rebound in electricity prices should underpin a strong earnings recovery. Risks remain if internal supply is insufficient to meet demand, forcing AGL to source energy for the open market.

    Fair Value Estimate: $13.30

    Aurizon Holdings (ASX: AZJ) owns the railway infrastructure for hauling coal (largely coking, or steelmaking coal) from mine to port. Morningstar believes considerable downside is already priced-in to the shares – implied by its 5.6 per cent full franked dividend yield – and that environmental risks are overblown.

    Fair Value Estimate: $4.70

    Technology

    Going against the grain of Morningstar’s typically value-oriented approach, WiseTech Global (ASX: WTC) is recommended despite a forecast price-to-earnings ratio of 93.3. Analysts like the large addressable market, high switching costs, strong balance sheet and low ESG risk. The recent share price weakness and overall negative sentiment towards technology companies presents an opportunity for investors.

    Fair Value Estimate: $65.00

    Most market participants are refusing to touch profitless tech companies with a ten-foot pole. However, Morningstar likes insurance software provider Fineos Corporate Holdings (ASX: FCL) for its self-funded future growth and the ability to expand its customer base via new verticals, regions and on-selling. Moreover, there is upside to the cost base from moving to the cloud, automating roles and hiring staff from emerging regions.

    Fair Value Estimate: $4.40

    Online retailer Kogan (ASX: KGN) is the final tech pick. Morningstar expects profit margins to expand as marketing expenses are scaled back. Additionally, the business will return to growth in 2023 after lapping exceptional prior year pandemic sales. It should retain its market share of 2.5 per cent while the overall Australian e-commerce market grows at high-single-digit rates over the next decade.

    Fair Value Estimate: $11.70




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